Stocks (^GSPC, ^IXIC, ^DJI) were mixed on Monday amid rising concerns over trade tensions. Dunham & Associates Investment Counsel chief investment officer Ryan Dykmans joins Market Domination to discuss how his firm's strategy underweights equities, noting that he does not believe "all the bad news is priced in."
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So I see here Ryan, you are underweight equities. Um, you know, we are down Ryan, about, let's call it roughly 10% from the top. But you you must not believe all the the bad news is priced in here.
Well, that's true. I don't believe all that the bad news is priced in, and and actually the way we're doing this is with a systematic overly that we implement called Dunham DC. And so, what this program has done is basically said, hey, equity prices relative to the historical averages have run up so quickly and so much, we should underweight equities by more than half of what we normally have. So, your 60-40 investor is currently with us sitting at about 33%, but that's because we bought a little back about two weeks ago when markets got near that that low that we saw around the 12.
So Ryan, if you don't like equities, where are you looking for the best opportunities right now? Is it fixed income?
Where do you where do you look next?
Sure. So, fixed income for us is an interesting spot because obviously, there's been some higher correlation there. Um, obviously, with the the great moves and anticipation last year, we saw a lot of the movements in the equity markets kind of translate over to the fixed income side. So what we've done is we've actually taken that fixed income allocation we have, which is what we are trading into, and what we're buying when we sell equities, and we've implemented a high amount of alternatives, things like merger arbitrage, and things like long short credit, and that those make up a sizable amount of our fixed income portfolio, along with bank loans, right? So, something that's high yield, and maybe a little scary when you hear the recession word. But, um, that's another spot that we put about 60% of our allocation to within that fixed income to try to bring down that correlation and make it not feel as much like equities.
Ryan, I'm just curious if you're underweight equities here, when you're talking to clients, you know, what do you what how do you explain to them what what maybe data points or metrics you you and your team watch, Ryan, closely that would suggest you okay, time to get more constructive?
Sure. So, when we're looking at this, we do pull up a longer history, right? We think that markets over time do move up. Um, markets are not one of those things that's been, you know, sideways for long periods, you're not getting compensated for the risk if you do that. And so what we show them is those long-term periods, we show them those periods of of dislocation where we saw like an 08, even 2018, 2022, um, those those drawdowns that you would see, and we show them that and say, look, you know, these are generally shorter term in nature. So if we can trade around them and participate in them, you know, with again, with dry powder because we've taken that money out of the equity markets, that's that can be beneficial. It can also lower the overall risk. And that's a bigger piece of this. People are very scared right now investing, not just because markets have taken a step back, but because of how high valuations have been for so long now. We've had two years where we had such extreme run-ups so quickly that investors feel like, am I buying at the top? And they've asked that question as it went higher. So having this this system that we use, the Dunham DC, we're able to cut that back, and we're able to say, look, we've calibrated this to current markets. We feel a little better about having less equity risk now, and there's still exposure. We're not going to zero in equities. That's not how my model works. But it does take it down, and it does take it down gradually. And I I have a silly thing I like to say that I'd rather be generally right than precisely wrong. And that's so that's because we're dialing out as they went up, and we're going to be dialing back in as they come back down.
